A Second Look At The Domenici/Rivlin Medicare Plan And Why It’s Still Problematic

A commenter noted that I was wrong to liken the Domenici/Rivlin “premium support” plan to Rep. Paul Ryan’s (R-WI) privatization scheme and suggested that the two are more different than I let on. That’s probably true for several reasons, as Alice Rivlin herself explained before the Super Committee yesterday:

1) Under Domenici/Rivlin, future enrollees would have an option of staying in the existing fee-for-service Medicare program, while Ryan would force tomorrow’s seniors to choose a private plan from an exchange.

2) The “premium support” that seniors receive to purchase coverage in Domenici/Rivlin will initially be tied to the second highest bid plan or fee-for-service, whichever is lower, and grow at the rate of GDP+1 percent. Ryan’s credit would remain independent of actual plan bids and would only grow the government contribution at the rate of inflation. Both indicators fail to keep up with health care spending, so seniors would have to pay the difference between the support and the actual cost of the plan out of pocket. But unlike Ryan, Domenici/Rivlin exempt lower income beneficiaries and dual eligibles are able to use Medicaid funding to pay for Part B premiums.

3) Domenici/Rivlin are likely to go further in regulating the private plans — and what kinds of benefits they can offer — than Ryan.

Domenici/Rivlin do more to protect lower-income beneficiaries from increased costs than Ryan. But ultimately, the plan still has significant shortcomings. Connecting the premium support credits to the second lowest plan in any given geographic area is certainly better than determining the credits independent of the actual bids, but as CBPP’s Edwin Park points out, in some markets, the second lowest plan is cheaper than coverage available through traditional Medicare. Thus, seniors who choose to stay in the fee-for-service plan would be responsible for the difference between the amount of the premium credit and the actual cost of the policy. Lower-income residents would receive additional assistance and would not have to pay more for traditional Medicare, the Bipartisan Policy Center’s Joe Minarik told me.

The other major challenge is the assumption that one can create a truly level playing field in which private plans are prevented from cherry-picking the healthiest beneficiaries and leaving sicker applicants to traditional Medicare. Minarik said that regulators can look to FEHBP for guidance, but admitted that we have minimal experience with competition within the elderly population and agreed that the regulatory process will be “challenging.” In that case, private insurers may still be able to attract a healthier population (and thus select against sicker applicants) by varying benefits by scope — ratcheting down certain services that sicker beneficiaries rely on like chemotherapy and building up coverage for healthier applicants, like preventive services.

So that, in a nutshell, is the problem: premium support sets us on an untested path of private competition that could do more to shift costs to seniors than limit overall health care spending. It moves the system closer to the Ryan ideal in which future Congresses could cut federal costs by eating away at the premium credit.

A better approach would be to take advantage of the bargaining clout of traditional Medicare and focus on modernizing the system through payment reform and delivery system changes.